SM Energy has entered into a joint acquisition with Northern Oil and Gas to buy XCL Resources’ oil-heavy Uinta Basin assets in a core area that SM says competes with the Midland Basin. (Source: Shutterstock.com)
SM Energy Co. has agreed to acquire Uinta Basin operator XCL Resources in a three-way deal that includes non-op E&P Northern Oil and Gas buying a 20% interest in XCL in deal valued at $2.55 billion.
SM Energy will purchase XCL, a private E&P backed by EnCap Investments LP and Rice Investment Group. Northern will concurrently buy a 20% undivided interest in XCL’s oil and gas interests for $510 million, bringing SM Energy’s net purchase price to $2.04 billion.
SM Energy said the deal adds high-margin barrels competitive with the Midland Basin due to “higher oil content, lower operating costs” and transport capacity, according to a June 27 press release.
In an SM Energy investor presentation, the company said XCL’s Uinta lateral costs are $800/foot with drilling, completion and equipping costs similar to SM’s Midland and South Texas assets and competitive with $1,000 per lateral foot costs in the Delaware Basin.
TPH & Co. analysts said the deal adds scale to its operations through its entry into the Uinta.
SM Energy intends to serve as the operator of the assets currently operated by XCL. SM Energy said it plans to finance the acquisition through a combination of debt and cash on hand.
Despite its relatively small size, the deal may face Federal Trade Commission scrutiny as the relationship between oil producers in the basin and refiners in Utah — and XCL Resources in particular —has come under federal scrutiny in the past. XCL has been pursuing an acquisition of Altamont Energy since at least March and has petitioned the FTC for approval.
EnCap had reportedly been exploring a sale of XCL Resources, whose backing of XCL Resources had been a sticking point for the FTC.
For SM Energy, the XCL Resources acquisition adds 37,200 net acres in the basin, 99% operated, and increases SM Energy’s “core net acreage by about 14%, the company said. SM Energy will also bolster production by 43,000 boe/d (88% crude oil), upping the company’s 2025 estimated net production to 195,000 boe/d (50% oil).
SM Energy will also add 490 net well locations with breakevens at between $43/bbl and $57/bbl, increasing the company’s inventory life by two years to an overall 12-year runway.
In 2025, SM Energy estimates a 50.45/boe cash production margin, increasing the company's cash production margin by about 11%.
SM Energy sees the Uinta Basin’s high oil content and stacked pay potential increasing the E&Ps’ “top-tier well performance and inventory with upside,” the company said.
Acquired for 2.9x next 12 months adjusted EBITDAX (at $78.00/bbl and $3.25/MMBtu), the acquisition is expected to be immediately accretive to key financial metrics, SM Energy said. At those projected prices, EBITDAX would increase by about 35%, free cash flow by 45% and its cash production margin by 11%.
SM Energy president and CEO Herb Vogel said the company’s differentiated technical team “has again demonstrated what sets us apart, having identified a unique opportunity to add top-tier assets with significant upside for a reasonable [transaction] multiple.”
“We believe that this transaction checks the boxes for our acquisition criteria, and we expect to demonstrate value creation through performance optimization, inventory expansion and growth in adjusted free cash flow," Vogel said.
Northern Oil and Gas said in a separate June 27 press release it will acquire the 20% undivided stake in the XCL assets in partnership with SM Energy.
The acquired assets are located primarily in Uintah and Duchesne counties, Utah, and include approximately 9,300 net acres and 97.6 underwritten net undeveloped locations, normalized for 10,000 ft laterals.
Northern said significant additional upside locations remain in the Deep and Upper Cube. The prospective development plan is based on conservative and widened spacing from the current operator. Northern sees substantial return upside from increased lateral lengths (extending to 3-miles) and cost savings from an integrated co-owned sand mine facility scheduled to come online within 12 months.
Upon closing and transition of services, SM Energy will be operator of substantially all the assets, with NOG participating in development pursuant to cooperation and joint development agreements entered into in connection with the acquisition.
Northern CEO Nick O’Grady said the continues to further define itself as the preeminent national, non-operated franchise, with low leverage, growing cash returns, diversified by both region and commodity mix.
“The XCL acquisition is consistent with our strategy of investing in the highest quality assets, with significant upside and long-dated inventory, developed and run by leading operators," O'Grady said. "The Uinta Basin has emerged as one of the best and fastest growing oil resources in the United States, and SM has a track record as one of our best and most responsible operators. We look forward to working with them for many years to come. We believe this transaction will be the most accretive in our history, benefiting per share net profit and free cash flow both immediately and over time."
Northern has now made several such tagalong acquisitions, including buying stakes in the Delaware Basin in conjunction with Earthstone Energy and Vital Energy in 2023.
SM Energy also announced that, due to “highly accretive cash flow metrics,” the company’s board has approved an 11% increase in its fixed quarterly dividend to $0.20 per share from $0.18, which is expected to commence in fourth-quarter 2024. SM Energy projects a reduction in post-acquisition leverage from ~1.3x net debt-to-adjusted EBITDAX to less than 1.0x by mid-2025 at current commodity prices.
The board also authorized a new $500 million share repurchase program through 2027, supplanting its existing buyback program.
To assist in financing the all-cash transaction, SM Energy has received firm commitments from J.P. Morgan, Bank of America and Wells Fargo for an aggregate $1.2 billion 364-day unsecured bridge facility.
The company's board of directors has approved the XCL acquisition.
The effective date of the XCL Acquisition is May 1, 2024, and closing is anticipated to occur in September 2024, subject to customary closing conditions.
Kirkland & Ellis LLP is serving as legal counsel to SM Energy. Jefferies LLC is serving as sole financial adviser to XCL. Vinson & Elkins LLP is serving as legal counsel to XCL.
RBC Capital Markets is serving as financial adviser to NOG for the acquisition.
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